On May 28, 2017, the Israeli Tax Authority (the "ITA") published a summary tax ruling in respect of the taxation of options and RSUs granted to relocated employees (the "Ruling"). Although these types of rulings have been granted by the ITA over the past few years, this is the first time the ruling is being published as part of the public summary tax rulings on the ITA's Internet site and therefore represents a clear position of the ITA as to the taxation of such awards. This client update provides a summary of the Ruling and additional insights.
An Israeli company whose shares are traded on the NASDAQ (the “Company”), has granted options and Restricted Shares Units (collectively the “Awards”) to its employees and officers under the capital gains route of Section 102 of the Israeli Income Tax Ordinance [New Version] 5721-1961 (the "Ordinance"). The Company is a global company who has subsidiaries worldwide (the “Subsidiaries”). The Company has employees who were granted Awards while employed in Israel and later relocated and became employees of one of the Subsidiaries abroad. In addition, there are employees of the Subsidiaries who were granted Awards while employed by such Subsidiaries and later relocated and became employees of the Company in Israel (all such relocated employees: the “Relocation Employees”).
The Company requested the ITA to approve that the Awards granted to the Relocation Employees will be subject to Section 102 of the Ordinance, and that their tax liability in Israel will be determined according to the vesting schedule of the Awards which occurred while such Relocation Employees resided in Israel.
Tax Ruling and its Conditions
The Ruling determined the following tax arrangement:
a. In respect of the Relocation Employees who relocated outside of Israel following the grant of Awards, the total gain upon sale of the underlying shares will be split into two components: (i) the number of days that lapsed from the grant date (or the vesting commencement date if earlier) until the relocation date divided by the total number of days that lapsed from the grant date (or the vesting commencement date if earlier) until the Awards vested (such gain: the “Israeli Gain”) (ii) the number of days that lapsed from the relocation date until the vesting date divided by the total number of days that lapsed from the grant date (or the vesting commencement date if earlier) until the Awards vested (such gain: the “Foreign Gain”). At the exercise date (as such term is defined under Section 102 of the Ordinance) the Company or the 102 Trustee will withhold tax from the Israeli Gain in accordance with the provisions of Section 102 of the Ordinance, and in addition, will withhold tax from the Foreign Gain in accordance with the provisions of Section 102 of the Ordinance while crediting foreign taxes which were paid by the Relocation Employee in respect thereto.
b. In respect of Relocation Employees who relocated to Israel following the grant of Awards, the taxation in Israel will be determined in accordance with the provisions of Section 3(i) of the Ordinance – meaning that the taxable event will be upon conversion of the Awards into shares, whether upon exercise of options or vesting of RSUs. At such date, the value of the gain will be split into two components, calculated in a similar manner to the calculation of the Israeli Gain and Foreign Gain, mutatis mutandis and taxed accordingly.
The Ruling will apply to Relocation Employees as of the date of issuance of the Ruling and to any future Relocation Employee provided they have consented to the Ruling.
Although not included in the Ruling we would like to note that in respect of the Relocation Employees returning to Israel, the Company can consider approaching the ITA to request a “change of route” ruling, which may enable such Relocation Employee to benefit from the provisions of Section 102 of the Ordinance in respect of the Awards which will vest following the return to Israel, rather than being subject to Section 3(i) of the Ordinance as prescribed under the Ruling. This should be discussed on a case by case basis.
Please note that the Ruling includes additional terms and conditions which were not fully detailed herein. In addition, the Ruling was published by the ITA in the form of a summary which does not include the full tax arrangement included therein.